Withdrawals from a Traditional IRA
Client (age 53) made non-deductible contributions in 2007 & 2008 into a Traditional IRA for he and his wife in anticipation of doing a Roth conversion in 2010. However, taking the prorata rules into consideration, the conversion does not look as appealing. The value of the accounts are less than the basis. Can he withdraw/recharacterize? his after tax contributions? TIA
Permalink Submitted by Anonymous (not verified) on Mon, 2009-10-05 16:08
Assuming these clients were not eligible to contribute to a Roth for 2008, recharacterization will not work. Although, they could recharacterize and remove the 2008 contributions as an excess from the Roth. That would be a tax reporting mess and have to be completed by Oct. 15, 2009 (it would solve the 2008 contribution though).
One thing I am not sure is if they take both years out as an excess – 2008 before the Oct. 15, 2009; 2007 already passed, so there will be penalties – if that takes them “out of the picture” and thus accomplishes the task?
pmk
Permalink Submitted by Alan Spross on Mon, 2009-10-05 23:14
2007 contributions would have to come out as an early distribution. But if the basis exceeds the account value, there is no tax or penalty on the withdrawal. Likewise, a Roth conversion would be totally tax free, and the amount of basis in excess of the TIRA value could become a potential misc itemized deduction.
This all assumes that this particular IRA is the client’s ONLY TIRA, SEP IRA or SIMPLE IRA. But since you made reference to the pro rata rules, perhaps this is not the case?